AmericAn GAs june 201420

Global gas trade has long been dominated by a

few nations, but that’s about to change. What will

proliferating production mean for gas markets and

geopolitics? By eric schoeniGer

a neW Worldorder

hen pro-russian gunmen seized control of crimean government buildings on Feb. 28, a shockwave rippled through europe. high on the list of europe’s concerns was the reliability of its natural gas,

one-quarter of which is piped in from russia.eight years ago, over a price dispute, russia briefly

shut the valve on gas that passed through Ukraine. A similar scenario played out in 2008. since those events, european leaders have been keen on diversifying their gas supplies and achieving greater energy security.

W

Tourists at one of the world’s busiest shopping streets, Shanghai’s Nanjing Road. Worldwide, China has the largest projected demand increase in natural gas over the next 25 years.

june 2014 AmericAn GAs 21

AmericAn GAs june 201422

It’s an objective shared by nearly every nation. But there has been a mismatch between who produces gas and who con-sumes it. Germany, Italy, the U.K., France, Japan, and South Korea have been among the largest importers. Russia, Qatar, Nor-way, the Netherlands, Algeria, Indonesia, and Malaysia were historically the largest exporters. (The North American market operated largely in isolation.)

Those realities may be changing, and fast—a result of America’s shale gas revolu-tion, as well as shale and conventional gas development in countries around the world (see map, page 24). The U.S., Canada, and Australia—and potentially Mozambique, Tanzania, Argentina, China, and others—could become major gas exporters region-ally or globally. That could dramatically rearrange gas markets. It could also shift balances of geopolitical power.

“Energy is a huge, complex, capital-intensive system that by its nature moves slowly,” Dick Benschop, president of Shell Netherlands and vice president, Gas Mar-ket Development, told American Gas. “In the energy market, you don’t often experi-ence a revolution. But the development of shale gas in the U.S. and Canada over the past five years has been nothing less than revolutionary.”

Adam Smith wrote about the invis-ible hand of the market. Natural gas has emerged as a very visible hand, soon to rearrange alliances and fortunes.

American HeroThe transformative hand of natural gas has been most apparent in the U.S. For years, America produced the bulk of its natural gas needs and had a small portion met by imports from Canada. By the early 2000s, with demand rising and access to domestic supplies limited, the nation began building import terminals to bring in LNG from outside the hemisphere. Chemicals compa-nies left the U.S., in part because of the high price and limited availability of feedstock gas. Other importers, like Japan and South Korea, grew concerned that prices in their

regions could rise along with U.S. demand.Then shale gas happened. In just a few

years, hydraulic fracturing and horizontal drilling in the Bakken, Eagle Ford, Marcel-lus, Utica, and other plays made clear that America would have plenty of gas to not only meet its own needs but possibly to help serve rising demand around the world.

Today, the nation’s LNG import terminals remain largely unused. Compa-nies from Shell to BASF to ExxonMobil are spending billions of dollars to build or reopen chemicals plants in gas-rich states. Foreign investors from Japan to Egypt are funding U.S. process manufacturing and gas infrastructure. Shale gas will directly or indirectly create 1.4 million new jobs by 2035, predicts IHS. As the nation’s gas infrastructure is further developed, U.S. gas utilities, as well as their industrial, com-merical, and residential customers, should enjoy overall stable supply and stable prices.

“Shale gas has allowed the U.S. to reduce its reliance not just on gas imports but also on oil imports,” as more energy and chemicals feedstock needs are met by gas, Katie Pipkin, senior vice president of business development and communications for Cheniere Energy, told American Gas. “In the past decade the U.S. has lowered imports of foreign crude from more than 10 million bbl/d to 7.5 million bbl/d. And we now export 3.5 million bbl/d of diesel and gasoline.”

Cheniere is the first company to begin construction of an LNG export terminal; its Sabine Pass liquefaction facility in Loui-siana is slated to come online next year. Six other LNG export facilities have been ap-proved by the U.S. Department of Energy. (for non-FTA deliveries). “Ultimately, the U.S. will become a net exporter of gas and other hydrocarbons,” Pipkin said.

The U.S. isn’t the only gas powerhouse in North America. Canada is the world’s third-largest producer of dry gas, ac-cording to the U.S. Energy Information Administration, and the source of most U.S. gas imports. But as the U.S. becomes more self-sufficient, Canada plans to ex-

port LNG. The country has six proposed liquefaction plants, one in Nova Scotia and the rest in British Columbia, well-positioned to serve Asian markets.

In fact, LNG exports from the U.S. and Canada could eventually rival those of Qatar, the world leader, Benschop said. But at 32 Bcf/d, the current LNG market repre-sents only 10 percent of the total world-wide gas market, Pipkin pointed out. And the U.S. won’t even be exporting 10 Bcf/d before 2020. Meanwhile, rising demand will call for another 150 million metric tons of gas a year by 2025, David Carroll, president of the Gas Technology Institute, told American Gas. All that gas will have to come from somewhere.

Continental DriftIn the wake of developments in Crimea, ambassadors to Poland, Hungary, Slovakia, and the Czech Republic sent a letter to U.S. House Speaker John Boehner asking the U.S. to expedite gas exports to Europe. Of course, that’s a long-term solution. For the foreseeable future, Europe will continue to get one-quarter of its gas from Russia. “The European gas companies dealing with Russia feel confident it will be business as usual,” said Carroll, who in 2015 will begin a three-year term as president of the International Gas Union.

Europe produced 10,183 Bcf of its own gas in 2012, the EIA reports. Norway and the Netherlands are the production leaders, followed by the U.K. at a distant third. “Europe has declining conventional reserves but a large pipeline capacity for imports, so they have the ability to improve supplies,” Pipkin explained. “But as they move from coal to gas, their gas demand will rise.”

That has many European nations look-ing to foreign LNG. Companies in Spain and the U.K., for example, have already signed contracts with Cheniere to import U.S. gas. Lithuania is developing a floating LNG regasification plant, scheduled to come online this year, which could meet much of the needs of Lithuania, Latvia, Finland, and Estonia.

an energy revolutionnatural Gas has emerGed as a very visible hand, soon to rearranGe alliances and fortunes.

june 2014 AmericAn GAs 23

Some European countries are also pur-suing shale gas. Germany, France, and Italy all have shale reserves that in some cases outstrip their conventional reserves. But shale gas remains a controversial topic in those nations, with France actually banning shale development. The U.K. and Poland, in contrast, are actively pursuing shale gas production. “Production in the U.K. and Poland won’t be on a huge scale in the short term, but that could change in the next decade,” Benschop noted.

As a consequence, Russia’s influence could wane. Although the amount of gas Russia exports should remain level, “both Europe and China will be able to drive harder bargains for Russian gas,” Laszlo Varro, head of gas, coal, and power markets for the International Energy Agency, told American Gas.

“The emergence of gas exports from the U.S. and Canada, Australia, and Africa will improve energy security in Europe,” Shell’s Benschop said. “Because, while European infrastructure and gas flows are important to its energy security, so is a broader and deeper worldwide supply of gas.”

Down Under on Top?Much of that broader and deeper supply will soon come from Australia, which holds vast reserves of both shale and coal-seam gas (known as coal-bed methane in the U.S.). Whereas Qatar leads the world in LNG production at 77 million metric tons a year, Australia could be topping 80 million met-ric tons by 2017, Bloomberg reports.

That’s welcome news to Asia. Long-time local exporters including Indonesia and Malaysia aren’t keeping up with demand. “Asia was self-sufficient five years ago, but demand is growing at 20 Bcm a year,” Varro said. Increasingly, the region relies on gas from Qatar and Nigeria. Japan and South Korea in particular have no domestic supply and are among the world’s largest importers.

In the future they’ll get some of that gas from Australia, but in the meantime they’re looking to North America. “A

a ny discussion of natural gas and geopolitics has to include the middle east—a geopolitical hotspot for

generations. how will the global gas revo-lution affect political tensions and interest in the region?

Qatar has the world’s fourth-largest proven gas reserves, at 890 Tcf, according to the U.s. energy information Administra-tion, and in 2010 produced the most LnG, at 77 million metric tons, according to LNG World News. “The world will always need Qatar’s gas,” says David carroll, president of the Gas Technology institute.

iran, with 1,186 Tcf, has even more gas than Qatar, and is the world’s third-largest producer. But economic sanctions have meant that in many recent years iran has been a net importer. Pipeline exports to iraq, Kuwait, oman, the United Arab emirates, and Pakistan could soon reach 4 Bcf/d, reports Oil & Gas Journal.

oman, the U.A.e, and egypt also ex-port gas in small quantities. But gas aside, much of the world will continue to rely on the region’s oil. “Worldwide interest in the region will remain, because political

tensions there are reflected in the price of oil,” says Dick Benschop, president direc-tor of shell netherlands.

Those tensions may escalate with local gas demand. “After china, the middle east has the largest projected demand increase over the next 25 years,” carroll says. “We’ll likely see declining exports and increasing imports in the region to meet demands for power generation, chemicals production, and [water] desalination.”

The wildcard may be israel. The coun-try has only 10.1 Tcf of proven reserves, according to the eiA, but recent offshore discoveries could add another 29 Tcf of recoverable gas.

While israel historically was a net importer, the new discoveries “should allow the country to become a signifi-cant exporter of natural gas in the next decade,” the eiA reports. in January the israeli government approved plans to supply the Palestinian Authority. Also early this year, houston-based noble energy signed 15-year agreements to supply two Jordanian companies with 66 Bcf of israeli gas starting in 2016.

natural gas and the Middle east

lot of Japanese companies, and some in Korea, are already securing supply from the U.S.,” Pipkin said. Japan and South Korea, along with Singapore and China, are also investing in the development of U.S. LNG terminals to ensure supply, Forbes reports. Varro predicts that a substantial portion of U.S. LNG will end up in Asia.

The wildcard in Asia is China. China has the world’s second-largest shale gas reserves behind the U.S., according to consulting firm Advanced Resources International. At the same time, “China has the largest projected demand increase over the next 25 years,” Carroll explained. “The country already has seven LNG import facilities, and it’s building at least six more.”

China’s gas production increased by 30 percent between 2008 and 2012, accord-ing to EIA data. But much of its shale gas

remains unproduced, in part because it resides deep in the ground—two to three times deeper than in the U.S., The New York Times reports. Still, Benschop said, “Don’t underestimate China’s ability to innovate.”

Transforming EconomiesCould some of China’s gas come from the east coast of Africa? Mozambique and Tanzania have made large discoveries of off-shore gas, with Mozambique now believed to hold more than 100 Tcf and Tanzania up to 200 Tcf of gas, according to various reports. Companies such as Anadarko, ENI, Statoil, and Total are working to develop the reserves. In addition, “China, Japan, and Korea are all investing in East African gas development,” Varro said.

Anadarko has predicted that Mo-zambique could become the third-largest

AmericAn GAs june 201424

Canada573

Mexico545

Australia437

SouthAfrica490

Russia285

Brazil245

United States1,161 China

1,115

Argentina802

Algeria707

EAST AFRICAMozambique and Tanzania have made large offshore discoveries. Domestic consumption and exports could transform their economies.

ARGENTINAArgentina has the third-largest shale gas reserves, but restrictive regulations have hampered its development.

EUROPEGermany, France, and Italy are ambivalent about their shale gas reserves, but the U.K. and Poland are actively pursuing development of theirs.

NORTH AMERICAThe U.S. has the largest shale gas reserves. Canada and Mexico are fifth and sixth. All could become major LNG exporters.

AUSTRALIAWith both shale and coal-seam gas, Australia could become the largest LNG exporter by 2017.

CHINAWith the second-largest shale gas reserves but rapidly growing demand, will China be a net importer or exporter?

RUSSIARussia is the world’s second-largest gas producer, after the U.S. But its market influence could wane as new sources come online.

Source: U.S. basins from U.S. EIA and U.S. Geological Survey. Other basins and data from Advanced Resources Int’l Inc., based on data from published studies.

Basins lackingresource estimate

Basins withresource estimate

Top 10reserveholdersin Tcf.

Who will be the nextsuperpowers of global gas markets?Shale gas and shale oil resources may drive shifts in geopolitical power.

neW FronTiers For GAs DeveLoPmenT

june 2014 AmericAn GAs 25

Canada573

Mexico545

Australia437

SouthAfrica490

Russia285

Brazil245

United States1,161 China

1,115

Argentina802

Algeria707

EAST AFRICAMozambique and Tanzania have made large offshore discoveries. Domestic consumption and exports could transform their economies.

ARGENTINAArgentina has the third-largest shale gas reserves, but restrictive regulations have hampered its development.

EUROPEGermany, France, and Italy are ambivalent about their shale gas reserves, but the U.K. and Poland are actively pursuing development of theirs.

NORTH AMERICAThe U.S. has the largest shale gas reserves. Canada and Mexico are fifth and sixth. All could become major LNG exporters.

AUSTRALIAWith both shale and coal-seam gas, Australia could become the largest LNG exporter by 2017.

CHINAWith the second-largest shale gas reserves but rapidly growing demand, will China be a net importer or exporter?

RUSSIARussia is the world’s second-largest gas producer, after the U.S. But its market influence could wane as new sources come online.

Source: U.S. basins from U.S. EIA and U.S. Geological Survey. Other basins and data from Advanced Resources Int’l Inc., based on data from published studies.

Basins lackingresource estimate

Basins withresource estimate

Top 10reserveholdersin Tcf.

Who will be the nextsuperpowers of global gas markets?Shale gas and shale oil resources may drive shifts in geopolitical power.

ALe

x re

ArD

on

AmericAn GAs june 201426

exporter of LNG after Qatar and Australia, and Tanzania could emerge as a major exporter, though that’s unlikely before 2025. In the meantime, gas could transform the nations’ economic outlook. In fact, PwC predicts that Tanzania will become one of the world’s fastest-growing economies.

Mozambique and Tanzania aren’t the only developing nations that could become big gas exporters. Argentina holds the third-largest shale gas reserves after the U.S. and China. And demand for gas among its Latin American neighbors will grow 29 percent between 2011 and 2017, the EIA projects. Its promise is hampered, however, by a restrictive regulatory environment. In fact, Argentina is currently a net importer of gas.

More promising is Mexico. At 545 Tcf of gas, Mexico holds the world’s sixth-larg-est shale reserves. “In the past, Mexico has failed to provide an investment environ-ment that would help it develop its shale plays,” Varro explained. “But increasingly, it’s on the right track.”

Recent government reforms have eased investment restrictions and tax burdens for state-owned Pemex. Now, for example, the company plans to spend $1.4 billion on pipelines to move gas from the Gulf Coast to the Pacific in a bid to one day serve Asian markets, GlobalPost reports. And for-eign companies such as France’s GDF Suez are investing in Mexican gas development.

In the short term, Mexico will continue to import gas from the United States. Go-ing forward, so will Latin America, Asia, and Europe. America’s shale gas revolu-tion means better energy security not just for U.S. utilities, manufacturers, and end consumers but for the entire world.

“The best answer to energy security is diversity of supply, including domestic gas, pipeline imports, and LNG imports from multiple sources,” Benschop concluded. “What’s interesting today is that wherever you are in the world, diversity of supply is improving. That should make energy sup-ply less volatile and geopolitics less volatile. It’s a very positive development.” u

on the right track:more promisinG is mexico, Which holds the World’s sixth larGest shale reserves.

d oes shale gas give north America an advantage in global exports? yes, say many experts. America’s shale-gas

revolution has been building for eight years. canada has been producing shale gas for nearly as long.

“The U.s. and canada have the technology, infrastructure, markets, service companies, and understanding of their ge-ology that other countries lack,” says David carroll, president of the Gas Technology institute.

Another potential advantage for the U.s. has to do with mineral rights. “if you drill on someone’s land in the U.s., the landowner can get rich,” carroll observes. “Almost everywhere else in the world, the money goes to the government.”

it’s no surprise, then, that “nearly 100 percent of global shale gas production has been in the U.s. and canada,” says Laszlo varro, head of gas, coal, and power mar-kets for the international energy Agency. in fact, china is the only other nation to produce commercially viable shale gas, and in tiny quantities.

The U.s. produced 25.7 Bcf/day of dry shale gas in 2012, 39 percent of its total dry gas production, the eiA reports. canada produced a little more than 2 Bcf/day, or 14 percent of its total dry gas production. china is the world’s largest holder of recoverable shale gas, but only 1 percent of its 10.44 Bcf/d production is shale gas.

in the U.s., industry and consumers also enjoy some of the lowest gas prices. But what will happen to prices at home and abroad as more countries enter the market?

A few studies suggest domestic gas prices could rise slightly as the U.s. ships gas overseas. But some experts dispute those

projections. “even after LnG exports begin, we don’t anticipate any significant domestic price increase, because more production will quickly come online,” says Katie Pipkin, se-nior vice president of business development and communications for cheniere energy.

how prices play out in other regions is harder to predict. natural gas isn’t traded as a global commodity the way oil is. in-stead, gas prices vary by country or region. As a consequence, in many regions gas contracts are tied to the price of crude oil.

That’s beginning to change. For example, in April France’s largest gas company, GDF suez, signed a 25-year contract to buy gas from BP and partners in Azerbaijan with prices tied to those in Western europe’s domestic gas market, Bloomberg reported.

in the U.s., contract prices are linked to the price at the henry hub, a major distri-bution waypoint in Louisiana. The U.K. has the national Balancing Point, or nBP hub. now other nations and regions, particularly Asia, are considering hubs, Pipkin says.

As gas from the U.s., canada, Aus-tralia, and other newly exporting nations comes online, prices might fall somewhat, some experts predict. But that will be limited by logistical realities. For U.s. exports, for example, “even if the henry hub price is low, once you add liquefaction, transporta-tion, and regasification, the price goes up,” carroll explains.

For the U.s., affordable prices and abundant resources will mean a leader-ship position for the next five to 10 years, experts say. “many observers underestimate the strategic advantage of the U.s. gas industry,” varro says. “other countries will try to replicate the U.s. shale gas revolu-tion. But the U.s. has significant advantages other countries will never be able to match.”

the north aMerican advantage